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Symptoms of Depression

If I were teaching a class on financial pathology, I'd begin with a diagnostic decision-tree of the type medical practitioners use to help them sort out one illness from another.  It would be a large series of "IF-THEN, ELSE" kind of statements that once nested, would help a person ascertain whether the economy was going to stabilize, or whether there's more pain to come.

 

Here are just a few of my collection of IF-THEN-ELSE statements that I use to sort through financial developments:

• IF credit is too easy THEN malinvestment occurs, ELSE healthy investment atmosphere.

• IF money injections exceed actual economic growth THEN monetary inflation, ELSE non-monetary inflation.

• IF jobs decline, THEN economic contraction ELSE questionable jobs data.

• IF CPI flat, THEN grocery bills stable, ELSE questionable CPI data

• IF gold goes up, THEN monetary inflation, ELSE gold price bubble

• IF Fed bails out one bank THEN expect more bank failures, ELSE Easter Bunny is real.

 

I offer these in no particular order; the point is that you can only have so many indicators that 'we're not out of the woods yet' before even the most ardent deniers will start bumping into trees.

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The Federal Reserve, in bailing out Bear Stearns this week, has given the astute investor something of a benchmark:  Bear is too big to fail.

 

It's not just that Bear's failure would cause problems in the US - the problems could become global/system (like they aren't already), leading the UK's Telegraph to headline "Bear Stearns exposed as a bank saddled with toxic sub-prime debt."

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Someone who has studied longwave economics might argue that the Kondratiev Wave might be going through an economic revolution which will lead to the abolition of the 50-70-year cycles in the economy.  And, to be sure, there is a case to be made.

 

But let's step back for a minute.  The whole 'purpose' if you can call it that, of an economic depression is to wipe out a long period of accumulated interest, malinvestment, and generally clean house so that a new foundation for economic growth can be started on a solid foundation with little (if any) debt.

 

The Panic of 1873 and the Great Depression of the 1930's had some common elements which must be considered, the largest of which is their occurrence about 10-years after the end of a major war.  Banks and brokerage firms collapsing was the outward symptom in both cases, and there was a monetary aspect in each - the Coinage Act in 1873, and the seizure of gold in the early 1930's.

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From a little reading here, we might infer that IF we're into a Second Depression, THEN we should see worthless paper, ELSE it may just be a normal recession.

 

The difficulty, however, is that digi-dollars in today's world can disappear, leaving us without the failed currencies and stock certificates which have accompanied past hyperinflation events and crashes, such as the Weimar Inflation or the Crash of 1929.

 

We're in a strange land where "digis" can just go 'poof!' yet the effect would be the same.  Just no evidence laying around with which to paper the bathroom.

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The Press seems to have gone schizoid on the where the precious metals are heading in the current environment.  On the one hand, we read reports that "Analysts see gold hitting US$1,200 in three months" (which I personally expect to be classic understatement), but on the other "The rising value of gold leads to a seller's rush."

 

So which is it?  A simple litmus test is provided by the markets.  If the price is going up for a commodity - such as gold in this case - then there are more buyers than sellers.  It's as simple as that. 

 

Could it be that so many people are flocking to jewelers to cash in gold that somehow the price will be constrained?  Forgive my skepticism, but I seriously doubt it.

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A simple reality check on gold's upper limit comes from a visit to the Minneapolis Fed site where you can plug in the momentary $850 high of gold in 1980 and see what the equivalent price today would be, thanks to the Fed's printing money faster than actual GDP growth:  $2,224..

 

By the same token, there's a historical 16:1 relationship between silver and gold. With gold's close over $1000 this week, a quick punch of the calculator says that today silver prices at its historical 16:1 relationship would price silver at $62.50 - and if applied to gold at $2,224.03, then a case could be made for $140 silver.

 

While I DO NOT OFFER FINANCIAL ADVICE, it's fair to say that in my commodity option account this week I did something I rarely do:  I 'chased' some options as silver was going up.  Linguistically, we could be looking at a shining spring which starts next weekend. 

 

What could drive prices so much higher that I'd profit from such a move? The coming April/May strike on Iran, of course.  Even without improvement in the present gold/silver ratio $1,200 gold (an Iran War slam dunk in my book) would push silver over $25.

 

The elections in Iran seem unlikely to change anything, and with the clock running out on his presidency, George and the neocons will want to do something while they still have enough time in office to prosecute the next war to its fullest.

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I doubt that I'm the only one who can use a calculator.  If we really do see $1,200 gold in three months, $21 silver would be a gold silver ratio north of 57 - which to my way of thinking is absurd.  So, either gold's got to come down, or (as I'm betting) silver will go up.  I told you I was buying silver around $7 an ounce in 2005 and looking back that call alone makes me feel like I've outgunned most of the hedge fund 'geniuses' out there.

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It's all really simple:  Before the New Worlders can move along to the next currency, this one has to be destroyed.  The easiest way to do that is with the printing press - something the Federal Reserve has been very good at.  What cost one dollar in 1913 when the Fed seized control of the nation's money now costs $21.7778.

 

So vast is the debasing of the nation's money that it now costs - you're going to love this - 1.7- cents to make and distribute a penny.  More amazing?  Fox Business reported this week that a nickel costs 9.5-cents! 

 

This is also why you shouldn't be surprised to read about copper theft in places like Portsmouth New Hampshire and Panama City Florida.

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It seems to me that when the metal in a coin is worth more than the face value of the coin, that a country has serious economic ills that haven't been addressed.

 

I'll let you in on a little secret:  Figuring out that a currency crisis with paper and digidollars has been a foregone conclusion to me every since the April 17, 2007 press release from the US Mint that melting of pennies and nickels would get you whacked with a $10,000 and up to five years in jail.

 

I mean, how tough is this to pencil out:  IF coins cost more than their face value THEN currency crisis ELSE coins have numismatic value.

 

Given that a penny doesn't have numismatic value (there's enough of them that I doubt they will be 'collectable' any time soon, the inference is that we're heading for what?  How about death of the dollar?  And with that, buying precious metals (and converting paper into real goods as quickly as possible) seems to make sense.

 

Not that it's a depressing state of affairs - it's a depression state of affairs.  But like all depressions in the nation's past, there's usually a way to play to win.  The traditional route of thrift, living below one's means, then buying bargains at the bottom of the cycle makes sense to me.  So when we get to the bottom in February 2010, you'll see me taking out loans again and leveraging the next round of inflation.  Between now and then?  I'll just be Mr. Cheap and save my pennies.

 

Memes: Them Winds

Our linguistic pals seem right on the money with their exceptional winds forecast, as Atlanta has been trashed by a tornado.

 

Diaspora

A reader caught the meme on TV Friday night:

"I'm not up on the timeline (when things are expected), but....

the word "migration" was mentioned on the New Hour tonight. In a statement similar to "...in the 1930's there were great migrations of people from one area to another. We haven't seen that yet.....but some are saying things are that bad."

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I'm not sure the parallels hold, lots of that movement was due to the Dust Bowl. Less rail traffic too. Seems to me people wouldn't really know where to go (where they'd be better) nowadays. I'd guess we'd be more likely to see migrations by whomever isn't washed away by the coastal event."

Aha!  Symptom of what?

Plane Speaking

Here's just what I need: A new Gulfstream 650 - so I can approach the speed of sound while jaunting here and there.  Pour me another shot of Jack, would yah?

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A little more affordable: 'smart glasses' that would make lost keys and phones a thing of the past.

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OK, more seriously, fewer folks will be dreaming of such gadgets: Home foreclosures up 60% in February.  Symptoms of depression.

 

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Coping: More on Car Cost Accounting

My notes on car costs yesterday drew some additional deep thinking on the subject:

George,

I've looked at this too. There are additional costs per mile other than depreciation. Toyota, Honda, Nissan face a straight depreciation to $2000 residual at 180,000 miles. For GM, Ford, Chrysler depreciate to $1000 at 150,000 miles.

Annual licensing: An older car in some states, like Colorado where I live, is cheaper for annual licensing: here $42 if your car is over 10 years old, no matter what type or size, where a new SUV will set you back $900 in the first year, $700 in the second, etc.

Insurance: An older car not worth insuring for comp/collision will save 30%-40% on insurance.

Sales Tax: Sales tax on an older car is less, usually by hundreds of dollars.

Leasing: If you lease a car, sales tax is charged on both the interest AND PRINCIPAL portion of your lease payment.

Obsolescence: This is the big one. Given the expected change in technology and gas mileage over the next 10 years, a new car had better pay for itself in 5 to 7 years, because all the iron on the road right now will be worth zero $ at the end of that time. An older vehicle would be a lot less to lose when it becomes obsolete.

Send snip and save items - anything that you find a useful strategy to remain sane in an un-sane world - to george@ure.net

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This week for Subscribers to Peoplenomics:

13 Acres and Independence Part 5:  Education: You Bet Your Life

This being Spring Break, let's postpone the actual developing, and building of your 'next life' farm/ranch/habitat/retreat/sanctuary to define the knowledge you'll need to make it really work, then plan to acquire the knowledge in the most cost-effective way possible.   We'll tread on sacred ground again by discussing how Higher Ed often SELLS useless (or very low value) knowledge in return for mountains of student loan debt.  But if you believe that a student loan will secure you're future, you could be DEAD wrong.  We begin with the distinctions between schooling, knowledge and education, understanding the pricing models of each, and build a plan to have the right mix of knowledge for the future.  No, it hasn't escaped our notice that the subprime meltdown has extended to student loans....

 

               More for Subscribers      Subscription Information

 

Tell Your Friends About This Site!

If you know anyone who is interested in preserving the Constitution, fighting usury from banksters, and shaking off consumer hypnosis, tell them about this site.  Click here to send 'em an invite...

 

No Incumbents Bumper Stickers

To get your "No Incumbents in 2008" click here.  They're just $5.  And no, that would not keep Ron Paul from running for the White House  he is not an incumbent for that office  having never held that job before, you see.  And the CONgressional folks?  Don't even get me started... Primaries this week in Texas and Ohio, to name just a few - eyes wide shut?

 

Mr. Cheap's Tricks

There are lots of ways to save money on food, shelter, transportation, and such.  It just takes a little reading and one source of good ideas is  our handy ebook "How to Live on $10,000 a year or less.  Still just $10.

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Last week's report is here.    If for back issues of this site, click here.  (Goes back to 1997!)

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I promised Elaine that I would unload some of my equipment, so if you're looking for ham gear, especially the older tube-type (EMP resistant) type, send me a note and I will send out the list of what I'm selling off when I get it together.    Click here to  Put Me On Ham Gear List

 

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Friday March 14, 2008

Truth Leak: Headline of the Week

This is a marvelous Freudian - hope they don't fix it...it's such a grand example of truth leaking out:

"Federal Reverse Pledges to Supply Cash"

There, don't you feel better with the Dow dumping on the bear Bear news (a fine double entendre, one might observe)? Perhaps the only better question would be "Does a bear dump in the Street?"

 

Unbelievable Inflation Numbers

Well, this sure doesn't square with my shopping experience, but here's the 'offishul' word:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in February before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The February level of 211.693 (1982-84=100) was 4.0 percent higher than in February 2007.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 0.2 percent in February prior to seasonal adjustment. The February level of 207.254 (1982-84=100) was 4.4 percent higher than in February 2007.

The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 0.3 percent in February on a not seasonally adjusted basis. The February level of 122.251 (December 1999=100) was 3.7 percent higher than in February 2007. Please note that the indexes for the post-2006 period are subject to revision.

CPI for All Urban Consumers (CPI-U)

On a seasonally adjusted basis, the CPI-U was virtually unchanged in February, following a 0.4 percent rise in January. Each of the three groups--food, energy, and all items less food and energy--contributed to the deceleration. The index for food at home, which rose 0.9 percent in January, increased 0.3 percent. The moderation reflected a downturn in the indexes for fruits and vegetables, for meats, poultry, fish, and eggs, and for nonalcoholic beverages. The index for energy turned down in February as a 1.9 percent decline in the index for energy commodities more than offset a 1.7 percent increase in the index for energy services. The index for all items less food and energy was virtually unchanged after increasing 0.3 percent in January. The deceleration reflects smaller increases in the indexes for shelter, for medical care, for recreation, for education and communication, and for other goods and services, and a decline in the index for apparel."

This may set off a screaming rally because there was no change in the core rate that's all items less food and energy because policy makers don't use those.  It clears the way to ink up the Fed's printing press with lower rates.

Me?  I've got plans to go bottom fishing for precious metals options on the decline here.

PPT Plans

Often called the Plunge Protection Team, the President's Working Group on Markets has issued its report on how they plan to operate going forward.  If you're a serious investor, you might want to read what amounts to the PTB's roadmap here.

 

Rogers: Lose the Fed

Jim Rogers, one of my commodity trading heroes, says "This man Bernanke just goes from bad to worse..."  Me?  Inflation of commodities has been highly tradable!  "A collapsing currency is not good for the world..." says Rogers.

 

Good News - Briefly

This may not last long, but there are some headlines on the economic front besides the manically reported CPI numbers which are not even remotely connected to the lifespace most of us live in.

 

For example, we read that the dollar has rebounded from recent lows against the Euro.  And if that doesn't send you falling to your knees in a chorus of Hallelujahs, how about the headline that oil backed off a bit from its record highs?  (You can get up now...it won't last.)

 

Maui Wowie

Gas at $4 in the Hawaiian Islands. Some come to the mainland, bro.

 

Hunger Pangs

Here's a good background article on how food shortages can lead to wars.

 

The Eggs Meme

The poisoned/eggs meme from modelspace a while back is starting to pop:  "Study finds over 100 harmful contaminants in Main bird eggs..."  Seems (linguistically) like a lot more headlines and coverage of this will follow, so we'll sit back and watch it build from here into the MSM...

 

Taxaholics Gathering

Probably the biggest story of the day is the battle going on in CONgress over taxes.  As the WSJ Online headlines it:  "Congress's Votes on Taxes Set Stage for Election Battle."

 

Of course one thing we'll be taking note of is whether the democorp and republicorp wannabes actually show up and cast ballots.

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As a side note, here's a ponder for you:  In this age of online encrypted banking and browsing from cell phones, why doesn't Congress simply login and vote online?  Purely from an JR standpoint, if I had an employee who missed as many votes as some of these folks, I'd have applied the not-yet-famous Ure Principle of Management: Three Strikes and You're Out.

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Credit Where Due:

Idaho Senator Mike Crapo's at least thinking about the issue of tax burdens.  On his web site this morning he has an interest rap about the Tax Foundation's "Tax Freedom Day" in 2007.

"Each year The Tax Foundation, a nonpartisan, nonprofit tax research organization, calculates the tax burden faced by Americans using Tax Freedom Day. This answers the question: What price is the nation paying for government. In theory, if all our earnings went first to taxes starting January 1 each year, Tax Freedom Day is the day on which we could start keeping some of our earnings. In 2007, Tax Freedom Day arrived two days later than in 2006. What's interesting is that the tax relief enacted in 2001 and 2003 moved Tax Freedom Day up 12 days earlier, to April 18).

 

Tax Freedom Day is calculated by dividing the official government tally of all taxes collected in a year by the official government tally of all income earned in the same year. It takes into account federal, state and local taxes. The Tax Foundation has been monitoring fiscal policy in our country since 1937.

 

It is distressing to realize that each year taxes are taking more and more out of the paychecks of working Americans.

 

For example, in 1900, Tax Freedom Day came on January 22, with taxes accounting for just 5.9 percent of income.

 

By 1950, Tax Freedom Day arrived on April 1, and taxes took up nearly 25 percent of income.

 

In 2007, Tax Freedom Day arrived on April 30, with taxes taking at 32.6 percent, the highest percentage since 2000.

 

So, we worked 120 days just to pay our taxes. It took 79 days for federal taxes and 41 for state and local taxes. Here's how that works out for the various taxes we face:

• 43 days for individual income taxes (33 for federal; 10 for state)

• 30 days for social insurance taxes (29, federal; 1, state)

• 16 days for sales and excise taxes (3, federal; 13, state)

• 12 days for property taxes (0, federal; 12, state)

• 14 days for corporate income taxes (12, federal; 2, state)

• 5 days for other taxes (2, federal; 3, state)

And as for the other expenses that we incur each day:

• 62 days for housing and household options

• 52 days for health and medical care

• 30 days for food

• 309 days for transportation

• 22 days for recreation

• 13 days for clothing and accessories

• 36 days for other expenses

If you look at the report for state information, the State of Idaho carries one of the lighter tax burdens in the country, coming in at 41st. Tax Freedom Day for the state came on April 19, eleven days ahead of the national Tax Freedom Day and nearly a month ahead of Connecticut's Tax Freedom Day of May 20. "

Crapo may not be Ron Paul, but at least he and his staff are looking at Tax Freedom Day. 

 

Let me see: April 30th is four full months out of 12.  Hand me the calculator would you?

 

That means we're all working a full one third of our lives to pay for government.  And with the next meeting of the Taxaholics, that's almost certain to increase again.

 

Haven't we saved enough Daylight and paid enough taxes to implement a Universal Four Day Workweek yet?

 

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Coping:  The Car Decision

I was having a discussion with a buddy early this morning and we got to talking about cars.  Yeah - worst things on the planet to buy.  And I told him that anymore, the way prices have been backed up on most used cars, you can buy a new car for about the same cost per mile as a used on.

 

"Look at the math," I told him.  And because it's interesting, let's run through a hypothetical car.

 

Suppose I wanted to buy a new Porsche Cayman S.  With a little shopping around I could probably get the car for $60,000 equipped the way I want.

 

To get to my operating cost per mile, I simply divide the cost of the car by 100,000 miles.  In this case, it works out to 60-cents a mile.

 

"Come on George, here's one on CarMax that's used - and you can get it for $47,000 and it only has 20,000 miles on it," my friend countered.

 

"Run out the same numbers:  $47,000 divided by (100,000 miles less the 20,000 that are on it) 80,000 and you come up with 58.75 cents a mile.  So for a penny and a quarter a mile, you want to lose some warranty coverage and inherit someone else's car?  Thanks, but no thanks..."

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Obviously, this is a 'dream car' kind of discussion, but the technique works equally well with cars like Toyotas and Nissans. 

 

So the car buying recipe I have is really simple, but it makes sense:

Take the Cost of New Car A

Divide by expected service life.  I think 100,000 miles is reasonable.

This is your operating cost per mile for the new car.

 

Now, take the Cost of Used Car B

Divide this by the same service life minus the miles on the used car

This is your expected operating cost per mile for the used car.

People who look at the depreciation of a new car when they drive it off the lot are correct.  But, this further step - looking at operating cost per mile over the expected service life of the car, is a much better approach, in my view.  While it's true that you'd take a beating on front-loaded depreciation if you sold the car right away, when you look at buying a car as a long term relationship (longer than some marriages, come to think of it) then buying a new car is sometimes just as good a 'deal' as an older car.

 

On the other hand, if you insist on flipping cars, to 'roll in a dats da bomb' then a 1-3 year old car might make sense.  Or, just buy a stylin & profilin 'chine you can live with for a while and plan to drive out 100,00